Comparing 1987 With 2013 Indicates Stock Crash Trajectory in Place

By on July 26, 2013

A couple of months ago I created a chart comparing the year 1987 with 2013 because the relentlessness of the current equity advance caused me to reminisce about that market over 25 years ago [link]. When I investigated the history behind the crash of 1987, whereby equities dropped over 20% in a single day, I was particularly alarmed to discover the reasons behind it.

The crash of 1987 was proceeded by a rise in global interest rates and Federal Reserve chairman Alan Greenspan’s tightening moves. That sounds eerily similar to today’s environment, although interest rates were remarkably high back then. The yield on the 10-year Treasury Bond had increased from 7% to 10% prior to the crash.

The 6% correction in the market last month made it appear the correlation was decoupling, but lo and behold, the market came storming back and the advance through 8 1/2 months is very similar for both years (see chart below).

I’d be surprised if we experienced a one-day crash of similar proportions, however, a significant drop over several months would not be unusual.

Personally I’ve been raising cash in anticipation of a better buying opportunity over the next several months. It will be interesting to see how this plays out.

Click on chart for larger image:

1987 Stock Market Crash

4 Comments

  1. Bee Arthur's

    July 27, 2013 at 8:12 pm

    This bears watching. Thanks.

  2. Anton Phibes

    July 29, 2013 at 2:34 pm

    Somebody else has noticed the similarities, but history is not prologue; and a crash is a extremely low probability event. Look here:

    http://finance.yahoo.com/blogs/breakout/stocks-heading-1987-style-crash-112708615.html

    And here: http://money.msn.com/top-stocks/post.aspx?post=eb1b3a9d-7fef-429f-b1b8-e451ae0819f4

    All the best,

    Dr. Phibes

  3. Fred

    September 16, 2013 at 5:24 am

    Great chart, would you have an update as of today?

    • Barron Maestro

      September 17, 2013 at 12:59 am

      Thanks. I’ll try to update the chart this week.

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